Evaluating PEMEX's Drilling Expansion to

Combat Declining Oil Reserves

A project partnering the
University of California at
Berkeley and Global EESE, a
globally collaborative, distributive
foresight network initiated by the
U.S. Department of Energy
Nicholas Nigro
Goldman School of Public Policy
University of California, Berkeley
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Presentation Overview
PEMEX Overview
Problem
Government dependency on PEMEX revenue
Decline in oil reserves since mid 1980s
Decline in oil production since 2004

Analysis of Drilling Expansion Policy

Final Recommendations
Future Work
Note: All data presented from PEMEX and U.S. EIA
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Acknowledgements
Dan Milstein and Carol Dumaine, U.S. Department
of Energy
Dan Kammen, University of California-Berkeley
Armand Peschard, Center for Strategic and
International Studies
Matthew Rodrigues, Natural gas trader from
private sector
UC-Berkeley faculty and colleagues: Candace
Hamilton, Blas Perez Henriquez, Rucker Johnson,
Steven Raphael, and Armando Salcedo
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX
Overview

Latin Americas largest company

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX Overview
Mexicos national oil and gas company
Nationalization of hydrocarbon sector in 1938
Supports the entire production chain
16th largest proven oil reserves in world
3rd largest supplier of oil to U.S.
High Federal taxes on revenue (not profits)
Historically little autonomy
Historically high profits (before tax) and low
investment since oil was easy to extract
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX Objective
Maximize hydrocarbons and by-products
economic value, contributing to the sustainable
development of the country
PEMEXs forecasts 100% reserve replacement
rate by 2012
PEMEX must address: labor relations and
negotiations, transparency, efficiency, and
financial stability
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Project
Problem
Government dependency on PEMEX revenue
and diminishing oil reserves and production
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

An Imminent Energy Problem

40% of government revenue is from taxes on
PEMEX
Oil reserves have been declining since the mid
1980s
PEMEXs answer in 2000: Expand Drilling
Oil production has fallen sharply since 2004

Net importer of oil by 2020 according to U.S. EIA

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Federal Government Revenue

1800000
1600000

Million Pesos

1400000
1200000

42%

2006

2007

43%

1000000
36%

800000
600000

38%

36%

30%

33%

2001

2002

40%

400000
200000
0
2000

2003

Non-PEMEX Tax Revenue

2004

2005

Tax on Pemex

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

60000

1400

50000

1200
2008 production
level is same as 1984
but revenues are
substantially higher

40000
30000

1000
800
600

20000

400

10000

200

0
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Oil reserves (million barrels)

Oil production (million barrels)

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Oil production (million barrels)

Oil reserves (million barrels)

Oil On The Decline

Drilling Expansion Since 2000

800

1000
950

700

Wells

600

850

500

800
750

400

700
300

650

200

600
2000

2001

2002

2003

Wells completed

2004

2005

2006

Oil production by well

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

2007

BOE per day

900

Drilling
Expansion
Policy Analysis
Evaluate policy effectiveness to determine
path forward

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Analysis Overview
Drilling Expansion Policy Definition
Policy Criteria
Revisiting Moroney-Assad analysis
Sustainability evaluation using econometric
models
Cost-benefit analysis of drilling expansion

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Drilling Policy Expansion

Oil production increases mandated by President
Vicente Fox in 2000; support continues with
current President Calderon
Huge increases in drilling for exploration and
development since 2000
Production losses at Cantarell have led to steep
production declines since 2004
New oil is not being found at a rate fast enough
to replace extracted oil
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Policy Criteria
PEMEXs Fiscal State
Energy Reform in 2008
Mexicos Energy Forecast
U.S. Energy Policy Changes
Political Barriers
Economic Limitations
Technological Limitations
Historical Perspective

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX Revenue Allocation

1800000
1600000
1400000
58.1%

Million Pesos

1200000
1000000
800000

62.5%

600000
400000

62.7%

59.2%

61.0%

2000

2001

2002

61.1%

54.9%

59.6%

61.3%

200000
0
-200000

Operating Costs

2003
Tax Costs

2004

2005

Net Loss

2006

2007

2008

Note: % is percentage of revenue

that is taxed

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Energy Reform In 2008

Program for Growth and Employment
Use nearly all funds from Stabilization Fund for Oil
Income Investment to build a new refinery

Petroleos Mexicanos Law

Public works and service contracts: allow for more
partnerships
Citizen Bonds: finance debt
Debt: greater autonomy for establishing debt
Budget: PEMEX can make budget adjustments
without approval
National Suppliers: Preference for Mexican
suppliers
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Moroney-Assad Analysis
From Energy and Sustainable Development in
Mexico from 2005
Used data from 1975-2000
Evaluated econometric models for
Exploration and Developmental Drilling
Successful Exploration and Development
Additions to Oil Reserves
Oil Production

Models revisited to include 2000-2008 data

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Moroney-Assad Conclusions
Model

Summary through 2000

Total
Drilling

Net Mexican oil export price predicts drilling

Drilling
Success
Ratio

More drilling increases success ratio

Oil
Reserves

More drilling adds to reserves

Oil
Production depends on reserve levels
Production
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Moroney-Assad Conclusions
Model
Total
Drilling

Summary through 2008

2000

Still
Significant
Unable
to reproduce
original
model drilling NO
Net Mexican
oil export
price predicts
Debt financing funds 95% of drilling

Drilling
Success
Ratio

More drilling increases

success ratio
Developmental
drilling reached
plateau
Exploration drilling ratio still increasing

YES

Oil
Oil
Reserves
Reserves
Oil
Production

More
adds only
to reserves
Drillingdrilling
expansion
marginally
successful
Production
on reserve
levels
Oil reservesdepends
still accurately
predict
production levels

NO

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

YES

Sustainability Evaluation
Three areas of focus
Oil reserves
Operational costs
Marginal cost per barrel of oil

Econometric models and correlations establish

relationships with areas of focus
Comparing 2000-2008 versus business-as-usual
evaluates effectiveness of drilling expansion for
oil reserves
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

46000

9000

44000

8000

42000

7000

40000
38000

6000

Inverse Relationship: Correlation

coefficient of -0.98 since 1993

36000

5000
4000
3000

34000

2000

32000

1000

30000

Total successful wells drilled

Oil reserves (million barrels)

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Total Successful Wells Drilled

Oil reserves (million barrels)

Oil Reserves And Wells Drilled

Oil Reserves And Employee

Count
50000
48000

42000
40000
38000

46000

Strong Relationship: Correlation

coefficient of -0.99 since 1996

44000
42000
40000

36000

38000

34000

36000
34000

32000

32000

30000

30000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pemex-Exploration and Production Employee Count

Oil reserves (million barrels)

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Number of Employees

Oil reserves (million barrels)

44000

50000

550

48000

500

Employee Count

46000
44000
42000

40000

450

Statistically significant correlation between

employee count and operating cost rate

38000

400

350
300

36000

250

34000
32000

200

30000

150
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Production and Exploration Employee Count

Operating Cost Rate (pesos/barrel)

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Pesos per barrel of oil

Marginal Cost And Employee

Count

Oil Reserves Evaluation

Oil Reserves (millions of barrels)

41000.00
39000.00
37000.00
-4.24%

35000.00

Net oil reserve

gain
of
2019
million
-5.67%
-4.93%2000-2008
barrels from
-1.59%
1.35%

33000.00
31000.00

-0.94%

5.17%

29000.00
27000.00
25000.00
2000

2001

2002

2003

Oil Reserves (forecast)

2004

2005

2006

Oil Reserves (actual)

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

2007

2008

R2 value of 0.68

Oil Production Evaluation

Oil Reserves (millions of barrels)

1250.00

12.78%

13.11%
11.37%
8.70%

1200.00
6.37%
1150.00
1100.00

4.77%

Net gain of 733 million barrels from

2.62%
1.29%
2000-2008

1050.00
-6.92%

1000.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil Production (forecast)

Oil Production (actual) R2 value of 0.45

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Sustainability Evaluation
Summary
Diminishing rate of return for each new well
drilled
Increasing marginal cost per barrel may prevent
some oil from being extracted
Marginal success for drilling expansion
Rate of oil reserve decline has lessened since 2000
Higher production than business-as-usual

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Cost-Benefit Analysis
Use total sales for benefits and total operational
costs for costs
Using company-wide numbers accounts for
benefits and costs in refining and other
subsidiaries of PEMEX
Project business as usual using data from 19901999

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Operational Costs
Year

Operational
Costs
(million pesos)

2000

1,718.90

2001

1,988.64

2002

0.00

2003

27,631.06

2004

37,700.95

2005

130,855.04

2006

172,370.50

2007

200,380.68

2008

449,639.75

Operational Costs (millions of pesos)

900000.00

108.88%

800000.00
700000.00
51.84%
46.35%

600000.00

36.99%

500000.00
400000.00
300000.00

0.68%
0.59%

10.95%
8.51%

-10.15%

200000.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total Operational Costs (forecast)

Total Operational Costs (actual)

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Sales Benefits
1400000.00
56.42%
1300000.00

Sales Benefit
(million pesos)

2000

54,067.92

2001

0.00

2002

0.00

2003

79,863.32

2004

225,916.43

2005

411,319.54

2006

552,012.89

2007

558,300.70

2008

749,770.63

Total Sales (millions of pesos)

Year

1200000.00

48.12%

1100000.00

47.36%

39.70%

1000000.00

24.89%

900000.00
10.47%

800000.00
700000.00

7.87%

600000.00
500000.00

-6.02%

-7.89%

400000.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total Sales (forecast)

Total Sales (actual)

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Cost-Benefit Summary
Year

Accumulated Benefit
(million pesos)

2000
2001
2002
2003
2004
2005
2006
2007
2008

687,004.86
599,625.62
620,922.21
763,133.92
907,783.10
1,035,970.21
1,147,093.83
1,178,750.95
1,328,950.00

Drilling expansion
provided millions of
additional pesos in
revenue for PEMEX
Much of the additional
revenue is due to high oil
prices from 2004-2008
Financial crisis of 2008
could lessen benefit
significantly in 2010

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Final
Recommendations

Defining a path forward for drilling at PEMEX

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

1. Parntnerships to Change
Political Will
Problem
Deficient technological capability
Economically inefficient policies

Solution
Increase collaborations and communication with
other national oil companies like Petrobras and
StatoilHydro
Learn implementation of effective policies that
improve social welfare and productivity of national
oil industry
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Parntnerships to Change
Political Will (Cont.)
Assessment of political will
for further reform of
hydrocarbon sector
including law changes to
allow PEMEX to operate
more efficiently

PEMEX undertakes massive

public advertising
campaign highlighting
partnerships with
Petrobras and StatOilHydro

Mexican government holds

joint conference with Brazil
and Norway to discuss
public polices related to
the hydrocarbon sector

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

2. Continue Drilling Expansion

Problem
Declining oil reserves and production
Increasing operational costs and marginal cost per
barrel of oil

Solution
Continue drilling expansion
Use more contractors or part-time workers to limit
full-time employment expansion

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Future
Work
Carrying this analysis forward

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Future Work
Highlight demand side opportunities in Mexico
to help prevent the 2020 switchover to a net
importer of oil
Investigate partnerships with universities in the
U.S. to learn advanced drilling techniques
Evaluate ballooning retirement costs at PEMEX
and its affect on long-term financial stability
Investigate potential for alternative energy
infrastructure in Mexico to allow PEMEX to
transition to an energy market without fossil
fuels
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX's Future
16th largest proven oil reserves
Continually decreasing reserves since 1984

Increasing possible oil reserves since 1999

Technology can turn possible into proven reserves

Federal Government and PEMEX support reform

and operational improvements
Energy reform in 2008 is a good step
Drilling expansion marginally successful since 2000
More reform is necessary to reverse declining
trends in oil production and oil reserves
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley